Spending too little on compliance can cause problems down the road

A new survey suggests that many companies in the financial industry may not have the resources needed to ensure an adequate compliance program – despite recent stepped up enforcement by U.S. regulators.

The survey, released by Cipperman Compliance Services, revealed that only 6 percent of respondents spent the recommended 5 percent of revenues on compliance efforts.

Actually, “The Cost of Compliance,” a 2013 study sponsored by KPMG, AIMA (The Alternative Investment Management Association), and the MFA (Managed Funds Association), suggested that firms should spend about 7 percent of operating costs for compliance, with a minimum of $700,000 a year.

Todd Cipperman, a former general counsel of SEI Investments and who is principal of Cipperman Compliance Services, said in an interview that, “Compliance, like legal, … is always in a fight for resources.”

He has seen companies where top executives in the C-Suite “talk the talk” but it can be “very hard” to get them to “walk the walk.”

It also appears there is a lack of knowledge about the consequences of not doing compliance efforts properly, he added.

In addition, it becomes very important for companies to spend an adequate amount on compliance because many larger clients will ask related questions – before doing business with a company.

The survey, which included broker dealers, asset managers, alternative managers and wealth managers, also showed that some​ 58 percent of asset managers said they need to focus more resources on compliance. Also, 83 percent of broker-dealers need more resources to manage compliance. On average, 74 percent of those with compliance duties said their firms should commit more resources to compliance.

“Firms need to show their commitment by dedicating the necessary resources. Simply naming one compliance officer is not a compliance program. Most firms need a staff and outside support to adequately address all the regulatory requirements,” Cipperman explained in a statement.

It was also shown that 57 percent of asset managers either did not have a compliance committee or were not sure when it met; and that number was 83 percent for broker-dealers.

“It is difficult to build a culture of compliance required by the current environment if your firm does not have a compliance committee,” Cipperman advised in a statement.

The survey also showed there was a lack of knowledge about some well-known cases, Cipperman said, adding that was a “bit shocking to us.” Only 64 percent of those surveyed were familiar with the Securities and Exchange Commission (SEC) investigation of SAC Capital, and 61 percent heard about the Galleon Capital scandal. Also, some 50 percent of broker-dealers were unfamiliar with any major SEC investigations.

Contributing Author

Ed Silverstein

Ed Silverstein is a veteran writer and editor for magazines, websites and newspapers. A graduate of Harvard's Kennedy School of Government, he has won several...